We're buying a condo in a new development in Boulder (more about the neighborhood soon).  I was struck by what seems like intentional underpricing by the developer.  I say this not just because I am, after all, buying the place (and thus have a higher reservation value) but because the condos aren't staying on the market very long.  As the developer releases new units every few weeks, the units go in a matter of weeks, or even days.  And no auctions or bidding wars -- if you offer the asking, it's yours. 

(FYI, unlike some developments, units are not offered for sale until they are almost finished.)

I'm told that underpricing in new real estate developments is a common practice.  Why?  Is it like the underpricing of IPOs?  I have heard a few theories. 

1.  Stoking demand.  The developer wants to maintain the image that this is a "hot" development where everyone wants to be.  Obviously, that isn't an end in and of itself -- rather, the developer want to make sure that it sells the last unit at the highest possible price.  (This theory is sort of like the theory that insiders underprice IPOs to make sure that they can sell after the lock-up into a heated market.)  If, at the time the last condo unit is completed, there are lots of other units left, the price will be depressed.   

2.  Financing.  Construction financing is contingent on selling x units by y date.  Even if the the developer could eke out a few extra dollars if it priced units a little higher, the extra wait might mean a higher interest rate on the financing. 

3.  Repeat play.  The developer would love to have the whole development sell out as it's finished in order to create/maintain a reputation for smooth execution of projects.  The developer needs this reputation to get its next project approved by local regulators.

4.  Negotiations.  Bargaining power is usually a lousy explanation for the design of contract terms, as it rarely explains why the stronger party would choose to exercise that power over terms rather than price.  Here, though, it makes some sense.  Maybe the seller is trading off price for standardized terms.  You can imagine that the condo is underpriced by, say, $10,000.  Because it's underpriced, the buyer is reluctant to delay the contract negotiations by pushing for too many non-standard terms during the negotiations, as the seller has other buyers on stand-by.  And the last thing the developer wants to deal with is non-standard terms on a new condo.  It wants to finish the project, not deal with fussy buyers.  So the underpricing creates some leverage and speeds the transaction to signing and closing. 

Is any of this persuasive?  Thoughts?  Other ideas?  I still feel like I'm missing something.

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